Protection Products

When it comes to the insurance industry, and specifically to how products are priced, men and women aren’t created equal.

Statistics prove that women live longer. So, when purchasing life insurance, they pay smaller premiums than men. Unfortunately, when it comes to disability insurance, that’s not the case.

All things being equal, a female will pay 30-50% more for a disability policy than her male counterpart. It’s because women are more likely to file a claim – not just for pregnancy, but for all types of claims.

The good news is that there is a solution. Multi-life. Most carriers offer some type of multi-life option, but I’m going to focus on Principal for this example. In addition to being one of the largest DI carriers in the market, they are also more flexible, and they offer unisex pricing options. To qualify as multi-life, they require policies to be placed on three or more people with a common employer. There is no requirement for the employer to contribute to the premium, although that’s certainly an option. In fact, the policies can be billed directly with no employer involvement.

Let’s use an example

Here we'll look at a 40-year-old female business owner in a white-collar occupation who lives in Indiana. For her policy, we’ll use a 90-day waiting period to age 65, and a $5,000 monthly benefit with residual. The premium for the policy, without any multi-life discounts, is $3,500 annually.

Now let’s assume that the client buys policies on two other employees. We just hit the magic number for making this a multi-life plan. Those two policies, after the discounts, can have annual premiums as low as $165 — which we can help you design. The client is paying a total of $330 per year for these two polices.

And now that the plan qualifies for multi-life, our client’s premium of $3,500 on her own policy is discounted to $2,300 annually. Her new premium, along with the $330 for her employees’ policies puts her total annual bill at $2,630. That’s an additional 25% savings, and her premium discount is locked in for the life of her policy — even if the other two policies are canceled later.

Buy more. Pay less.

I believe that’s what we call a win-win.

Your Ash DI team can help you structure a multi-life plan for male and female owners. The discount on the females is much more significant — it lowers the female rate to be similar to that of a male — but don’t let that stop you from considering multi-life plans regardless of gender.

Take a minute to consider small businesses you work with. If multi-life is a viable solution to protect them and their employees, let us know. We’re here to help.

Watch More on This Concept

When we think of financial retirement strategies, our first thoughts are usually strategies involving Individual Retirement Accounts (IRAs) or annuities. And that makes sense. They are an important part of a secure retirement and they fill a vital need. Today, however, I’d like to throw out another idea— that of using life insurance to optimize retirement income.

Before I dive into the how, I want to start by looking at the financial lifecycle, which begins with your first job. The financial lifecycle has two components: human capital, or the ability to earn an income, and financial capital, or monetary wealth, built up over time. Human capital can be converted into financial capital as workers earn wages and save some of those earnings. For example, this occurs when deductions are withdrawn from workers’ paychecks and deposited into their 401(k) accounts.

Both human capital and financial capital are used over a couple’s lifetime to generate income. During their early working years, couples tend to have higher amounts of human capital and lower amounts of financial capital. As the working years wind down, human capital diminishes. Ideally, at the point of retirement, enough financial capital is in place to generate income for a couple as long as it is needed.

Let’s look at an example

A couple, both age 30 and both high-income earners. They plan to retire at age 65, giving them 30 years of human capital before we need to have it all converted to financial capital to fund their retirement. They each have a qualified plan balance of $125,000 and nonqualified balance of $25,000. Their annual qualified contributions are $19,000 each; nonqualified contributions are $25,000 each.

During their working years, life and disability income insurance are important in case of an immediate need. It’s also a time to plan for retirement, so we put annuities in place, and have the long-term care conversation to make sure they are prepared for an extended health care need. The qualified and nonqualified funds they are investing in are for retirement, as is a plan for long-term care. That’s when these solutions really come into play.

A continued need

After retirement, though, the need for life insurance doesn’t go away, although it might change a bit. Life insurance can be purchased to help achieve several different goals, including income protection, efficient wealth accumulation and wealth preservation

All of this sounds great, but how do you do it? The short answer is by understanding Section 7702, which defines life insurance, modified endowment contracts (MECs) and tax-advantaged life insurance. The taxation of non-MEC life insurance is actually more favorable than many of the traditional retirement products.

Taxation of Life Insurance vs. Alternatives

Traditional IRA

Roth IRA

NQ Investments

Annuity

Life Insurance

Tax-Deductible

Yes

No

No

No

No

Tax-Deferred

No

Yes

No

Yes

Yes

Tax-Free Distributions

No

Yes

No

No

Yes

Tax-Free Legacy

No

Yes

Yes

No

Yes

Unlimited Contributions

No

No

Yes

Yes

Yes*

*Subject to suitability and financial justification limitations

Back to our couple of 30-year-olds, and how to apply this concept. Start with a minimum non-MEC death benefit, purchased with their nonqualified cash flow. This is will be funded now, while they are still converting human capital to financial capital. On retirement, the death benefit will be level.

Using their $25,000 annual nonqualified investment, we will cover a portion of their insurance need and utilize Section 7702 to create a favorable tax location all while reducing investment volatility.

In this example, the female earns a $1.3 million death benefit, net of savings, to age 65. Her projected cash value at retirement is $3 million, and her tax-free retirement income projection (age 65-90) is $230,000. The residual death benefit is $500,000.*

Make it work for your clients

We can help achieve similar results with your clients. Identify high earners between the ages of 20-55. Incorporate this concept into their term insurance strategy. It all starts with having the conversation. Then tap into your Ash resources. Our Life Sales team is always happy to help structure a plan that is the right fit for your individual client.

Our world is full of complicated information. And the insurance industry is notorious for creating products that can be hard to understand. I’m sure we’ve all had clients suffer from “analysis paralysis” when trying to decide between multiple solutions. But it doesn’t have to be scary.

As advisors, we experience success when we can break down the complexities into a strong solution that the client can understand. And, believe it or not, it IS possible to simplify the way we help our clients fund a long-term care plan.

Once you’ve talked with your clients about long-term care and helped them understand the value of a written plan, it’s easy to stall out. But a written plan is only half the story. If they decide to use an insurance strategy to fund the plan, they will need our expertise to figure out the best way to proceed.

To keep it simple, there are four main categories to consider when finding the funding. Learning about your client’s complete financial picture will be your guide when deciding which funding option to recommend. And, once you’ve got that figured out, your Ash team is perfectly positioned to help create an individual solution for each client. The key is to choose a funding method that won’t force the client to sacrifice lifestyle or other financial goals.

Let’s look at each option, and which type of client it is most likely to fit best.

Cash Flow: Cash flow is actually more than just cash. This is a good option for clients at or nearing retirement. They might have RMDs that they don’t need, a strong pension, income from a rental property, Social Security or other retirement income. If the client has enough cash flow to fund ongoing premiums without hurting their lifestyle, this can be a straightforward, easy-to-explain option.

Idle Assets: This is ideal for clients with CDs, money market accounts, or cash value life insurance that doesn’t meet their needs anymore. Idle assets, by definition, are assets that aren’t working for the client. Think of them as gasoline still sitting in the pump. Until you put it in the tank, it’s not doing any good. Your clients can use idle assets to fuel their LTC plan.

Qualified Accounts: Qualified accounts are things like IRAs or 401(k) and 403(b) accounts. They are plans that the client paid into with tax-deferred dollars. Clients might be afraid to use these funds because they’re scared of the taxes that will be due when they do. Luckily, there are options to minimize the tax hit when these accounts are used to fund a long-term care product. So it solves two issues—what to do with the qualified money and how to pay for long-term care. Win-win.

Non-qualified Accounts: Because non-qualified accounts are funded with post-tax dollars, there is more flexibility and less concern over taxes with these assets. These are things like non-qualified annuities and the cash value from life insurance. They can be exchanged for LTC products without triggering a taxable event.

As advisors, we’re juggling lots of moving parts to create a solid financial plan. The upside is that by understanding the complete picture we’re in the perfect position to take assets from vehicles that don’t meet the client’s needs and use them to fund a long-term care plan. Because without a solid plan for long-term care, the entire retirement plan is at risk. And that’s something to be afraid of.

When you believe in something, you talk about it. To everyone. Some clients seem to embrace it. Others seem to blow it off. That can be hard, but it seems to be the nature of our business.

For us, that conversation is long-term care planning. We understand why having a plan for the future matters so much. Sometimes it’s hard for clients to grasp. But it’s something we believe in strongly, and a message that we’ve worked hard to share. You may have brought up the topic with your clients and gotten mixed results.

So, when we say have the conversation with everyone, we mean it. But rather than blindly bringing up the need for an LTC plan, it makes sense to start with the clients who will be most receptive to what you have to say.

Not sure who those clients are? Start by looking at their ages and determining which stage of life they are in. In each group, your most likely prospects will share some of the same characteristics.

The common thread: At any age, your strongest prospects are those that have seen first-hand a loved one experience a long-term event. They’re planners. They believe in insurance products and the protection they offer. And they can to afford to purchase those products.

In Their 40s

For this age group, start with high-income earners who are helping parents or grandparents prepare for an emergency. They are dedicated planners who already have life insurance, potentially with high cash values.

Most likely, these clients will seek you out to discuss LTC. The strategy with clients in their 40s is to remind them that buying young costs less and allows for fewer hurdles when it comes to underwriting.

In Their 50s

Your most likely candidates have substantial assets they don’t want to risk losing. They’ve saved and planned. They might be currently helping their parents through a long-term care event, but they no longer have children dependent on them at home.

When approaching these clients, talk about the need to be proactive. Underwriting should still be relatively smooth. Plan to have more than one appointment with them. Use a strategic approach.

In Their 60s

Focus on clients that have enough assets to fund a long-term care plan without invading their retirement income. Look for clients who are relatively healthy and who have idle assets earmarked for an “emergency.”

The message for clients in their 60s is to act before they need extended care. It’s easy to start the conversation because it’s already front of mind for these clients. Let them know you can help reposition idle assets to cover a possible long-term care need and possibly leave a legacy for their grandchildren.

Once you’ve identified who you want to talk to, reach out to your Ash LTC team for strategies and solutions. We’ll help you create a plan that fits for each individual, no matter what stage of life they are in. There’s only one thing you have to do: Just Ask.

In every successful business, there’s always a handful of people you couldn’t do without.

Some are out in front. Others, behind the scenes. Either way, they are the people that make the business go. Without them, the business owner would be lost.

Maybe it’s the top sales person, bringing in more revenue than everyone else. Or the office manager who takes care of the day-to-day tasks — tasks that everyone else doesn’t even realize needed to be done. Or it’s the programmer who provides the skills needed for technology to be an asset instead of a headache. It could be all three.

Think about your business owner clients. What would they do if they lost an irreplaceable person? Would they have to close the doors? Or sell the business?

In our industry, we’re committed to planning for the future. We protect individuals, families and businesses from life’s “what ifs.” We help them prepare financially. And we help them avoid risk whenever we can.

When working with your business owner clients, don’t overlook the need for key person disability insurance.

Getting Started

There’s a good chance that you’ve talked to your business owner clients about purchasing life insurance on key employees. If that’s the case, they’ve already identified those essential people that drive the success of the company. If not, that’s the first step. Talk to your business owner clients and figure out who they consider key employees.

Once identified, discuss what the employer would do without them. Although we often look at life insurance first, there’s a higher chance that the person will become disabled, not die. Fortunately, we can protect against that.

How Key Person Disability Insurance (DI) Works

Key Person DI helps a business owner replace lost revenue when an essential employee becomes injured or disabled. And there are lots of options out there, and lots of ways to customize coverage to fit specific needs.

Most key person DI policies work the same, with the benefit:

Paid directly to the company on an indemnity basis, with no restrictions on how the benefit is used

Received tax free to the business (but the premiums are non-deductible)

Topping out at three times the key employee’s income, or less, depending on how the policy is designed and the carrier options

Paid monthly, as a lump sum, or as a combination of the two

Paid for a benefit period of up to 24 months

Let’s think about that in practical terms. You have a business owner whose key employee is out on a disability, and they aren’t sure how long the illness will last. After personal concern for the employee, cash flow is most likely the next big need. With a key person DI policy in place, it’s a huge relief to know that the business will have cash benefits to spend on hiring a temp or outsourcing certain responsibilities. It means they can stay afloat while still being supportive of the employee. In many cases, it’s the difference between barely surviving and being able to continue to move ahead.

Go Deeper

Get everything you need to know to get started talking about key person disability with your clients. Download our free solution sheet, "Key Person for Non-Owner Employees" for more!

Designing a Policy

We mentioned that there are many ways to design a policy, and we weren’t kidding. But there are some general guidelines to use when figuring out the right level of coverage. And your Ash team is always here to help.

Specifically, you should consider:

Elimination period: How long does the business want to wait before benefits kick in? This is measured in a number of days generally ranging from 90 to 730 days depending on the payout option. The shorter the elimination period, the higher the premium.

Aggregate benefit: This is a derivative of the employee’s salary. The benefit is usually three times the person’s income for the length of the policy.

Benefit payout: A combination benefit can be the best of both worlds. A monthly benefit supplemented by a lump sum payable later can be a great solution if the disability lasts longer than expected. Of course, only monthly or only lump sum are also payout options.

Start Your Discussion

Although nothing can replace an employee that’s, well, irreplaceable, key person DI can offer financial protection. In addition to providing funds for a temporary replacement or to offset the cost of recruiting new talent, a key person DI policy can assure clients and partners that the business is financially stable. And it’s a great employee retention strategy.

Don’t limit your discussion of key person coverage to life insurance. The need for DI protection is just as important — and just as achievable.